"I guess there is an over-reaction, a knee-jerk response to events in the US, but its pretty clear that the downward risks to economic sentiment short-term are very large."

Worse than manufacturing

Ahead of the survey, analysts had high hopes for the service sector's ability to continue to grow, even though a survey released on Monday suggested the manufacturing sector is shrinking

Such hopes were dashed by the Reuters survey.

"Significantly, the decline in the euro area services PMI in September was sharper than the equivalent manufacturing PMI," Mr Teather said.

"Fears of a world wide recession, already evident before this month, heightened significantly following the terrorist attacks," said the company that compiled the survey on behalf of Reuters, NTC Research.

Rate cut

Economic weakness in the service sector strengthened hopes of a cut in interest rates when the European Central Bank meets next week.

The data "supports our expectation of a cut in the ECB's rates on 11 October", said Mr Teather.

In the US, the cost of borrowing was slashed for the ninth time on Tuesday.